Similar legislation backed by the Bush administration was introduced in the 107^th Congress, but was not enacted.

At a press briefing, Labor Secretary Elaine L. Chao said the legislation "is aimed squarely at the gap in coverage among small businesses, the bedrock of our economy and job creation."

Called the Small Business Health Fairness Act, the legislation would allow "bona fide" trade and professional associations to establish self-insured groups on behalf of their members.

The groups would be exempt from state insurance regulation, but would have to meet federally mandated solvency requirements.

These include a mandatory indemnified backup plan to assure claims are paid, independent actuarial certification of solvency on a quarterly basis, and mandatory surplus reserves of $2 million.

The Washington-based National Association of Manufacturers praised the legislation as crucial to small businesses who want to provide health insurance. A number for the bill was not immediately available.

Neil Trautwein, NAM's health care lobbyist, said the legislation allows small businesses to take advantage of the same economies of scale, bargaining clout and administrative efficiencies enjoyed by large employers and unions.

But Donald Young, president of the Washington-based Health Insurance Association of America, said the legislation would create an "unlevel playing field," creating one set of rules for employers who can join an AHP and a different set for those who can't.

Moreover, he said, the proposal could lead to adverse selection.

"The preferential treatment of AHPs with respect to state mandated benefits and rating restrictions will almost certainly result in a migration of small employers, particularly healthier groups, out of the general small group market into AHPs," Mr. Young said.

Premium rates, he said, will likely rise for the employers left behind, forcing them to drop coverage and destabilizing the entire small-group market.

Mr. Young added that if enacted, the legislation would increase the risk of fraud in the marketplace and may create the need for an expensive new federal regulatory structure that duplicates the one already in place in the states.